posted at 11:51 am on December 10, 2012 by Mary Katharine Ham

As they continue to wrangle over the year-end fiscal deadline, both Democrats and Republicans are considering caps on federal income-tax deductions.

That could be very bad news for residents of New York, New Jersey and other states and cities that rely heavily on their own income taxes. Such a cap would reduce the value of the deduction for state and local income taxes, which has been part of the federal tax code for a century (though the deduction has been diluted by the alternative minimum tax). That could substantially reduce middle-class disposable incomes in high-tax states, which, in turn, would put pressure on those states to cut taxes and the services they have long chosen to provide. (A cap would also affect property and sales taxes, though those are spread around more evenly among all the states.)…

The theory behind the deduction was that the amount paid to states in taxes is not really part of an individual’s disposable income, because it is obligatory and, therefore, should not be taxed twice. Over time, the deduction has become the equivalent of a subsidy from the federal government to states that believe in a strong and active government. That may infuriate conservatives in low-tax states like Texas, who hate subsidizing states with different views of government’s role, but it’s actually a good thing for the country.

As the Washington Examiner editorialized earlier this month, the state and local tax deduction is unfair for a number of reasons. To start, it means that Americans who choose live in low-tax states have to effectively subsidize those who choose to live in high-tax states. It also means that people who live in high-tax states are somewhat insulated from the effects of electing politicians who raise taxes to pay for more government.

The deduction also disproportionately benefits taxpayers with higher incomes. The CBO has written that, “the deduction largely benefits wealthier localities, where many taxpayers itemize, are in the upper income tax brackets, and enjoy more abundant state and local government services. Because the value of an additional dollar of itemized deductions increases with the marginal tax rate (the rate on the last dollar of income), the deductions are worth more to taxpayers in higher income tax brackets than they are to those in lower income brackets.” In 2009, according to the CBO, those who earned over $100,000 enjoyed 73 percent of the tax benefit from this deduction. An older 2007 study by the Tax Policy Center found that 53 percent of the tax hike associated with repealing the reduction would fall on those earning over $200,000.

If this deduction were eliminated, it would trigger an anti-tax revolt at the state level. Residents of high-tax states would put more pressure on state lawmakers to cut taxes.

The NYT explains that the deduction is super-awesome, even though it requires smaller-population states with lower incomes to subsidize their public sector, because their public sector is doing the righteous work of taking care of citizens. The way the NYT explains this, red states are just falling down on the job what with their budgeting within the bounds of sanity and not becoming California and Illinois. As much as I enjoy subsidizing the moral superiority of Manhattan editorial writers, what they fail to recognize is that all of this generosity at the hands of other states can’t go on forever. What if all 57 states decided to accrue $150-500 billion or so in debt? It actually requires a modicum of restraint to make sure the state can continue to provide the benefits it has promised. But whatevs, just keep serving the least among us— by which I mean anyone who works for the government and might be in danger of contributing a cent toward their own health coverage— without ever wondering whether you can afford it. I’m pretty sure that’s how the country’s best charities work, right?

In other news, Politico headlines its Battleground poll today: “Hike taxes on the rich.” I don’t want to minimize the political pickle Republicans are in— 60 percent support tax hikes on those over $250K— but check out the accompanying graphic. Can you identify something round about that last line that has higher support even than tax hikes on the rich but not a daggone person is talking about?

Most of the poll results follow the pattern of Obama-era polling— everyone thinks everything sucks and none of it is deemed his fault—but a couple interesting tidbits from the internals, which signal an opportunity for Republicans to capitalize:

Since the era of Ronald Reagan, women have traditionally been more open to cutting defense spending than men. This has changed in recent years, and now women take a harder line than men on the military budget. While 41 percent of men favor making significant defense cuts and 56 percent oppose them, only 34 percent of women favor cuts and 62 percent oppose them. That’s a 15-point spread.
Women believe the world is more dangerous, Democratic pollster Lake explained, and they see cutting the military budget as harmful to the troops.

Democrats split evenly on whether to increase taxes on small businesses making more than $250,000, with 49 percent in favor and 49 percent opposed.

The opposition to raising taxes on small business provides a critical opening for GOP negotiators.

“I don’t think we are aggressive enough about standing up for small business, and we cede too much of that to Republicans,” said Lake.

Blowback

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There’s plenty of defense related spending that can be cut. It is still government spending, and as such a theft, (although Constitutionally mandated), from the private sector where it is utilized much more efficiently.

Still doesn’t change the fact entitlements, welfare, and insane health spending are the real drivers of debt. Grown men are making a career of being permanently disabled due to “back pain” and depression.

In my town 2000 Somalis turned out for 200 rent-controlled apartments and had to be maced into submission. They parked at the apartment and church lot next door, all over the streets, and in people’s driveways. This cannot continue forever.

antisense on December 10, 2012 at 1:12 PM

Our problem is not in the inefficient level of spending by the government on things that government should be spending on. Our problem is the government spending money on things that they should not be involved in.

National defense is something the government should be spending on, as are intelligence agencies, and federal law enforcement. Whether those budgets could be trimmed significantly is almost completely beside the point.

Our problem is entitlement spending that we are committed to every single year. Pork to unions, hyper-inflated spending on schools, huge sums to the EPA and special interests.

If we did nothing but pare back goverment spending to things that are proper functions of government, this whole fiscal crisis would be over.

Oh, I don’t know about that. Isn’t it much better to give away someone else’s money than your own – especially if you’re “borrowing” the money in such a way that someone else has to pay it back?
This is pretty well in line with “how to make mo money without using yo money…”

64% think corporate taxes are too low?? Are they not aware that the US already has the highest corporate tax rates on the planet? That it’s cheaper for internationals incorporated under US law to actually borrow funds to meet their needs than to repatriate foreign profits because of the tax laws? That it’s not at all unusual any more for US corporations to shelter their profits in more “accommodating” jurisdictions? That no corporation is required by law to keep its operations anchored in the US? What fools these 64% are.